Term Structure Estimation with Survey Data on Interest Rate Forecasts

By Don H. Kim, Athanasios Orphanides. Journal of Financial and Quantitative Analysis, 2005

331 citations recorded by the source corpus.

Abstract The estimation of dynamic no-arbitrage term structure models with a flexible specification of the market price of risk is beset by severe small-sample problems arising from the highly persistent nature of interest rates. We propose using survey forecasts of a short-term interest rate as an additional input to the estimation to overcome the problem. To illustrate the methodology, we estimate the 3-factor affine-Gaussian model with U.S. Treasury yields data and demonstrate that incorporating information from survey forecasts mitigates the small-sample problem. The model thus estimated for the 1990–2003 sample generates a stable and sensible estimate of the expected path of the short rate, reproduces the well-known stylized patterns in the expectations hypothesis tests, and captures some of the short-run variations in the survey forecast of the changes in longer-term interest rates.

Subfields: Demography, Finance

View Paper: https://www.semanticscholar.org/paper/45f7bab51fad16053a816eb81d2e7c0a43ab95ed

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Citations in the corpus

The Affine Arbitrage-Free Class of Nelson-Siegel Term Structure Models (2010, unknown): “This identification eliminates the troublesome local maxima reported by Kim and Orphanides (2005), i.”
Explaining and Forecasting Bond Risk Premiums (2010, background): “For a technical discussion of the main reasons why this information is insufficient to adequately estimate the dynamics of the term structure in various phases of the business cycle, see Kim and Orphanides (2005). Basically, two different strategies may be pursued to minimize these problems: Add exo”
Estimation of Affine Term Structure Models with Spanned or Unspanned Stochastic Volatility (2014, background): “As the literature on ATSMs has developed over the last decade, there is a consensus that estimation can be challenging; see, e.g. Duffee(2002), Ang and Piazzesi(2003), Kim and Orphanides(2005), and Hamilton and Wu(2012).”
Risk Premiums in Dynamic Term Structure Models with Unspanned Macro Risks (2013, unknown): “This is inconsistent with surveys on interest rate forecasts (Kim and Orphanides (2005)),20 and leads to the attribution of too much of the variation in forward rates to variation in risk premiums.”
The response of interest rates to U.S. and U.K. quantitative easing (2012, background): “12 As discussed in Kim and Orphanides (2012), the inclusion of short and long-term survey forecasts of future three-month T-bill rates in the estimation of the KW model serves two purposes.”
Forecasting Interest Rates with Shifting Endpoints (2012, unknown): “Survey forecasts are used in term structure models by, among others, Piazzesi and Schneider (2011), Chun (2011), Ehling et al. (2012) and Kim and Orphanides (2012).”
Trend and Cycle in Bond Premia (2009, unknown): “…Literature • predictability regressions Fama & Bliss 1987, Campbell & Shiller 1991, etc • statistical analysis of interest rate survey data Froot 1989, Kim & Orphanides 2007, Chernov & Mueller 2008 • role of survey expectations in other markets Frankel & Froot 1989, Gourinchas & Tornell 2004,…”
The Signaling Channel for Federal Reserve Bond Purchases (2013, unknown): “†Federal Reserve Bank of San Francisco, michael.bauer@sf.frb.org ‡Federal Reserve Bank of San Francisco, glenn.rudebusch@sf.frb.org Electronic copy available at: http://ssrn.com/abstract=2334518”